Low margins, skills shortages and strained relationships are all symptoms of the industry’s development cycle. So how can clients and contractors join forces to tackle these damaging side-effects?
Tony Gates, Balfour Beatty | Mike Grice, Battersea Power Station | Lucy Homer, Lendlease | Bob Lang, Arup | Scott Newson, NG Bailey | Michael O’Callaghan, Kier | James Pellatt, Great Portland Estates | Bill Robertson, Robertson Group | Derek Shewan, Robertson Group | Doug Wilson, Old Oak and Park Royal Development Corporation
Construction is an evolving industry.
Its cyclical nature means the balance of risk between clients and contractors is in constant flux.
It is one of the reasons contractors operate on such low margins and has certainly worsened the industry’s growing skills crisis, with legions of workers having exited during the downturn.
The industry’s evolution can also change the dynamic between clients and contractors as firms come under pressure at different points in the development cycle.
So in an industry that is constantly changing, how do contractors keep track of what clients want – and how do they make sure they’re providing it?
This was the central theme of a roundtable hosted by Construction News in association with Robertson Group this month, which brought together a range of senior industry figures.
The debate kicked off with one of the construction industry’s main challenges: low margins.
Robertson Group chairman and founder Bill Robertson pointed out how main contractors generally inclined to subcontract the majority of work, which has allowed them to pass risk down the supply chain to chase volume. This has in turn driven margins down to unsustainable levels – particularly for SMEs, he said.
The clients in the room made clear that this level of unsustainability is something they wanted to avoid.
“I see value-engineering as failure”
Lucy Homer, Lendlease
Battersea Power Station construction director Mike Grice and Great Portland Estates head of projects James Pellatt agreed they wanted contractors to make a profit. Both clients stated they are attempting to address this through early contractor engagement to ensure projects run as smoothly as possible for all involved.
Mr Pellatt said in an evolving industry, many project design teams lacked the necessary skill at the beginning of a project, which made design and supply chain engagement crucial.
Lendlease executive general manager for design Lucy Homer, who works within the company’s construction business, sympathised with Mr Pellatt. Her company, the only one at the table that operates as both a developer and contractor, had been putting early engagement initiatives into place.
“I see value-engineering as failure,” she said, referencing Lendlease’s ‘Design it Once’ initiative, which brings the design team and supply chain into the development process sooner.
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Before moving into construction, Ms Homer worked as an architect for 15 years and said she was struck by the lack of communication between design teams and the supply chain when she moved into contracting. “If you are able to set up something from day one and you’re able to agree what the designers are doing and what the supply is doing, that makes things open and honest, so that’s where I think we should be,” she argued.
Comparing the design process and construction process in different parts of the world, Arup director Bob Lang described London as “very bespoke”. There was a willingness to push design and construction responsibility onto a subcontractor and have it packaged up, he added.
Balfour Beatty director Tony Gates said an increasing number of major project clients were also bringing the supply chain in early within the design phase. Some of his team, for example, were already working on the second phase of High Speed 2 as consultants.
The need for early contractor engagement is also prevalent in the public sector, especially at the vast Old Oak Common and Park Royal site in west London.
Its chief operating officer Doug Wilson said the team was keen to hear from the sector, which had already resulted in a lot of interest – particularly from Chinese investors. He admitted there were challenges with this, including people asking for details about the scheme that the client was not yet able to answer.
Several other challenges are thrown up by early engagement, particularly around competition.
Mr Grice said he was a “great believer” in early contractor engagement, particularly on the Battersea project, for which three mammoth phases have already been tendered with a construction value totalling more than £2.5bn.
The third phase, which was awarded to Bouygues in September 2015, totalled £1bn alone. Mr Grice explained that with something of this scale, engaging early with contractors is crucial to successful delivery. However, he questioned how companies could keep “the competitive tension” on projects where contractors were brought in early on in the development process.
In response, Mr Pellatt suggested that achieving an appropriate balance of risk was the answer. But he said that during difficult times in the development cycle, this balance of risk between clients and contractors tended to be knocked out of sync – a problem exacerbated by “cynical” surveyors.
“It’s extremely hard to attract young people into construction and until we address that we are never going to get our industry back on track”
Derek Shewan, Robertson Group
The recent shift in the London market had been caused by inexperienced residential clients entering the market, he suggested, which had seen surveyors advise large firms to recover losses by transferring risk down the supply chain.
He argued that through trust and honest dialogue, contractors and clients could work together to deliver high-quality schemes for the right price. “We need to get rid of this blame culture, which is created from some snotty-nosed PM [project manager] who doesn’t really know what they are doing but has to find blame,” he added. “This means that everyone shuts up and is too scared to offer [suggestions] because they’re scared of getting it wrong.”
This attitude to partnering and collaboration was shared by everyone around the table.
Kier director Michael O’Callaghan used a project he worked on at Gatwick as one example. He described the initial design of the scheme as “messed up”, but explained how the whole team – including the client, consultants and contractors – worked to deliver the project on time and under budget.
He also sympathised with Mr Pellatt’s frustration of having too few skilled designers working on project teams. The issue around skilled workers is not going away – something everyone agreed represented a major problem for both contractors and clients.
The difficulty of attracting young talent continues to hamper the industry, as Robertson Group chief operating officer Derek Shewan highlighted.
“It’s extremely hard to attract young people into construction and until we address that we are never going to get our industry back on track – we’ve missed two generations of school-leavers already,” he said.
For NG Bailey’s London business development manager Scott Newson, whose business employs a significant number of trade staff, the problem is that young people want to progress quicker than the industry will allow.
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“[Sometimes] you need to be older [in the construction industry] because you have to have experience,” he said. [So] you have a problem where younger people want to move quickly and want to progress and actually [the industry] doesn’t allow you to.”
This urgency to progress made it difficult to retain workers, which was why NG Bailey invested heavily in its workforce, he said.
Mr O’Callaghan suggested that, rather than increased investment, focusing on social status represented a simpler solution to tackling the skills problem. He worked in Germany for three years, where he said people gain a social status when they enter the built environment.
“When you tell someone in Germany that you have a Herr Diplom, there is an instant recognition of a social status. That’s why Germany has some of the best engineers in the world because bright young people see that social status and want to become [part of] that. But when I tell someone I’m an engineer in the UK here they expect me to fix the plumbing, which is not what I was trained for.”
“You have a problem where younger people want to move quickly and want to progress and actually [the industry] doesn’t allow you to”
Scott Newson, NG Bailey
He argued that the various skills in the built environment required greater social credibility, adding that “you only have to look at Facebook to see how important social status is to people”.
Mr Newson turned the debate to the challenges construction firms faced when investing in skills as well as research and development. He compared construction with the car industry, noting the amount vehicle manufacturers invested in developing new cars, but pointed out that funding R&D was challenging when operating on 1-2 per cent margins.
Balfour Beatty’s Mr Gates countered this by pointing out that the car industry was able to invest in new technology because – unlike contractors – it had the certainty of demand, with the cyclical nature of construction again being at the heart of the problem.
So how does the industry create an environment where contractors can invest confidently?
Mr Robertson brought the discussion back to margins, arguing that if a job didn’t offer the 4 per cent return necessary for contractors to invest back into their businesses, then that job should “go in the bin”.
This resonated with Ms Homer, who said contractors must be braver when tendering for jobs. She agreed with a point from Mr Pellatt around the difficulty of working in the residential sector and said Lendlease had previously chosen to only agree shell-and-core packages with clients, refusing to take on the fit-out element because of unrealistic client expectations.
Taking a brave stance like this can bear fruit, she suggested, with clients opting to come back to Lendlease as much as six months later to finish off the job.
Challenges of direct employment
The importance of also valuing your supply chain was something about which Mr Pellatt felt strongly, arguing that investment in the workforce could boost productivity.
But the cyclical nature of the development cycle made this investment difficult due to the peak and trough of workloads, which require a varying amount of staff.
Because of this, Mr Pellatt said he would not expect main contractors to directly employ a large workforce all the time because clients develop in cycles, which would render it unsustainable. However, he argued that companies should invest in R&D during that time to ensure they are prepared when clients return to the market.
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Mr Grice understood the problems presented by the development cycle in terms of workload, but said he would like to see more contractors directly employ labour. One of the main reasons a client chooses a contractor is down to their in-house capability, he added, and that it was disappointing when work was outsourced.
“I’ve worked with big contractors that have had that in-house capability and you are able to pick up the phone and [discuss your project with them].” He agreed with outsourcing during the peaks of the development cycle, but queried what a firm’s USP was if it didn’t have that in-house capability. Mr Gates said he had that in-house capability at Balfour Beatty but that this was not the case for some of his competitors.
For Mr Robertson, investing in new talent throughout the development cycle remained a must. He suggested past problems had stemmed from main contractors not directly employing enough people then passing the risk onto their subcontractors – something he was firmly against.
With various different components making up the industry at different points in the development cycle, how do clients both in the public and private sector manage and maintain their supply chain relationships?
Mr Pellatt said Great Portland Estates was coming to the end of its development cycle and was about to start a two-year research period, during which the client would be in “listening mode”.
Perhaps during these periods clients will be able to learn about the industry’s various innovations – something Mr Robertson believed was often overlooked.
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He used the example of PFI as an area where contractors had been able to provide a range of offerings – such as investing, building, owning and managing assets – with public sector clients. His company was now using this PFI model “day-to-day” with private sector clients, and he wondered whether other clients perceived contractors as having these skills.
He concluded by urging clients and contractors to share and learn from each other for the better of the industry.
Evidently, there are many external and internal pressures that pray on clients and contractors and can shape the way in which a scheme is delivered. However, the general feeling in the room was that the only way of addressing those pressures was through engagement and honesty throughout the development process.
As the industry continues to evolve, it is only through engagement that clients and contractors can keep track of each other’s needs.